Ch 5&6
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Questions and Answers

What is the primary role of a financial manager?

  • To provide financial assistance to employees
  • To increase the value of the firm
  • To make decisions on behalf of the firm's investors (correct)
  • To manage the firm's marketing department

    • In a cost-benefit analysis, what determines if a decision is good?

  • The benefits are lower than the costs
  • The benefits and costs are equal
  • The benefits are higher than the costs (correct)
  • The costs are higher than the benefits

    • Which of the following disciplines is NOT used in real-world opportunities?

  • Organizational Behavior
  • Economics
  • History (correct)
  • Marketing

    • What is the primary goal of a competitive market?

    <p>To determine the value of a good</p> Signup and view all the answers

    What determines the attractiveness of an opportunity?

    <p>The net value using market prices</p> Signup and view all the answers

    What is the role of the financial manager in decision making?

    <p>To make decisions on behalf of the firm's investors</p> Signup and view all the answers

    What is a key characteristic of a competitive market?

    <p>Goods can be bought and sold at the same price</p> Signup and view all the answers

    What is the goal of a financial manager when making decisions?

    <p>To increase the value of the firm</p> Signup and view all the answers

    What is the primary factor that determines the value of a commodity or asset to a firm or its investors?

    <p>Its competitive market price</p> Signup and view all the answers

    According to the Valuation Principle, what should be used to evaluate the benefits and costs of a decision?

    <p>Market prices</p> Signup and view all the answers

    Why do only current prices in a competitive market matter in the Valuation Principle?

    <p>Because we are transacting today</p> Signup and view all the answers

    What is the Law of One Price?

    <p>A law that states that securities with the same cash flows must have the same price</p> Signup and view all the answers

    What is arbitrage?

    <p>The method of buying something in one place and selling it in another place at the same time to make a profit</p> Signup and view all the answers

    What is an arbitrage opportunity?

    <p>A situation where you can make a profit without taking any risk or making any investment</p> Signup and view all the answers

    What is the time value of money?

    <p>The difference in value between money today and money in the future</p> Signup and view all the answers

    What is the main goal of Enterprise Risk Management?

    <p>To handle risks harmonious with the strategic plan</p> Signup and view all the answers

    What is the name of the professional organization for Risk and Insurance Management?

    <p>RIMS</p> Signup and view all the answers

    What is the term for the absolute maximum dollar amount of damage?

    <p>Maximum possible loss</p> Signup and view all the answers

    What type of property includes patents and human capital?

    <p>Intangible property</p> Signup and view all the answers

    What is the term for the value of an asset or property at the time of loss?

    <p>Actual cash value</p> Signup and view all the answers

    What is the process of identifying and assessing potential events that may impact an organization?

    <p>Risk identification</p> Signup and view all the answers

    What is the term for the disruption or failure of a firm in a supply chain?

    <p>Supply chain risk</p> Signup and view all the answers

    What is the term for the process of evaluating and prioritizing potential losses?

    <p>Loss measurement</p> Signup and view all the answers

    What is the book value of a firm roughly equal to?

    <p>The total amount all shareholders would get if they liquidated the company</p> Signup and view all the answers

    What does market value capture that book value does not?

    <p>Profitability, intangibles, and future growth prospects</p> Signup and view all the answers

    What is the replacement value of an asset?

    <p>The amount of money that could be obtained by replacing the existing asset</p> Signup and view all the answers

    What is an example of a liability risk?

    <p>All of the above</p> Signup and view all the answers

    What is vicarious liability?

    <p>Employers being held liable for the unlawful actions of employees</p> Signup and view all the answers

    What is an example of a tort?

    <p>Assault</p> Signup and view all the answers

    What is strict liability?

    <p>Liability without fault in some circumstances</p> Signup and view all the answers

    What is workers' compensation?

    <p>A no-fault compensation program</p> Signup and view all the answers

    What is negligence in the context of torts?

    <p>Failing to use reasonable care according to a 'reasonable man' standard</p> Signup and view all the answers

    What is the purpose of punitive damages in tort law?

    <p>To punish the defendant for outrageous acts</p> Signup and view all the answers

    What is the 'res ipsa loquitur' tactic used for in court?

    <p>To shift a legal burden to the defendant</p> Signup and view all the answers

    What is a type of human resource risk that can result in loss of income and business continuation problems?

    <p>All of the above</p> Signup and view all the answers

    What is a type of damages that compensates for the loss of life's pleasures?

    <p>Hedonic damages</p> Signup and view all the answers

    What is the standard of proof required in a tort law case?

    <p>Preponderance of evidence</p> Signup and view all the answers

    What is vicarious liability?

    <p>Holding another party liable for the defendant's actions</p> Signup and view all the answers

    Why is it important to regularly review and update risk management processes?

    <p>To adapt to changes in the business environment</p> Signup and view all the answers

    Study Notes

    Cost-Benefit Analysis

    • The role of a financial manager is to make decisions on behalf of the firm's investors, ensuring that the benefits of a decision exceed the costs.
    • Real-world opportunities often involve multiple disciplines, including marketing, economics, organizational behavior, strategy, and operations.
    • A decision will increase the value of the firm if the value of the benefits exceeds the costs.

    Market Prices and the Valuation Principle

    • In a competitive market, the price determines the value of a good, and personal opinions of the "fair" price are irrelevant.
    • The Valuation Principle states that the value of an asset or commodity to the firm or its investors is determined by its competitive market price.
    • The benefits and costs of a decision should be evaluated using market prices.
    • If the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm.
    • Current prices in a competitive market are the only relevant prices when evaluating a decision.

    The Law of One Price and Arbitrage

    • The Law of One Price states that securities with the same cash flows must have the same price in competitive markets.
    • Arbitrage is the method of buying something in one place and selling it in another place at the same time to make a profit from the price difference.
    • An arbitrage opportunity is a situation where it is possible to make a profit without taking any risk or making any investment.

    The Time Value of Money and Interest Rates

    • A dollar today is worth more than a dollar in one year due to the time value of money.
    • The time value of money is the difference in value between money today and money in the future.
    • If you deposit $1 at a 10% interest rate, you will have $1.10 at the end of one year.

    Enterprise Risk Management

    • Ultimate objective is to handle risks harmonious with the strategic plan
    • Making pre-loss arrangements for post-loss resources
    • Need for loss identification and risk identification

    Employment

    • Staff varies based on size and responsibility
    • All firms and people engage in risk management
    • Career opportunities internally to firms and externally, like consultants and brokers
    • Occupation is professionally recognized – RIMS – Risk and Insurance Management Society

    Useful Methods

    • Identify & Measure (evaluate)
    • Choose most efficient tool(s) for Control
    • Implement and review

    Risk Identification

    • Identify how and what to identify:
    • Balance sheet
    • External/Internal
    • Income statement
    • Pure/Speculative
    • Other records
    • Direct losses
    • Indirect losses
    • Key personnel
    • Operations
    • Checklists
    • Flow charts
    • Questionnaires

    Measure (Evaluation)

    • Maximum possible loss: the absolute maximum dollar amount of damage
    • Maximum probable loss: a conservative estimate of what is likely to occur in a worst case loss
    • Relative Frequency: an estimate as to the number of times the loss will occur

    Property Risks

    • Tangible Property:
    • Real Property
    • Business Property
    • Intangible Property:
    • Patents
    • Human Capital
    • R&D
    • Reputation
    • Brand Awareness

    Property Risks

    • Damage to the Property of Others:
    • Supply chains are interconnected
    • Disruption or outright failure can occur at a firm
    • Affecting other firms in supply chain

    Valuing Property

    • Replacement value versus book value versus actual cash value versus market value
    • Book value: net value of a firm's assets found on its balance sheet
    • Market value: company's worth based on the total value of its outstanding shares in the market
    • Replacement value: amount of money that could be obtained by replacing the existing asset
    • American legal system based on the notion that a person should be responsible for the damage caused to others
    • Negligence:
    • Failing to use reasonable care according to a “reasonable man” standard
    • A reasonable person thinks before speaking or acting, and is honest and moderate in all activities
    • Question of fact
    • Other parties can be held liable:
      • Vicarious liability
      • Joint-and-several liability

    Establishing Negligence

    • Plaintiff must show:
    • Legal duty
    • Failure of the duty
    • Injury
    • Causal connection between the injury and the failure
    • Jury must weigh the facts based upon “the preponderance of evidence”

    Types of Damages

    • Compensation for Personal Injuries:
    • Medical
    • Lost wages
    • Future wage loss
    • Pain and suffering
    • Punitive Damages:
    • Compensation to punish a defendant for outrageous acts
    • Punitive damages against insurers:
    • When insurers act in bad faith in resisting an insured’s legitimate claim
    • Other Damages:
    • Hedonic damages - loss of life’s pleasures
    • Mental anguish

    Human Resource Risks

    • Loss of Key Person
    • Disability – physical (medical) or mental
    • Loss of health
    • Unplanned retirement
    • Results in loss of income, business continuation problems, replacement and training issues

    Review and Update

    • Regularly review and update the process:
    • New assets or disposal of assets
    • Valuation changes
    • New products, processes, and operations
    • New personnel
    • Law changes
    • Currency fluctuations
    • New contractual relationships

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    Related Documents

    Chapter 5: Time Value Of Money PDF
    Chapter 6 Risk Identification PDF

    Description

    Learn about the role of a financial manager in making decisions that maximize benefits while minimizing costs and understand the concept of market prices and valuation principle.

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